Rating agencies do not often react with a change in outlook to positive when a borrower announces a debt transaction (unless the deal is M&A related). But Standard & Poor’s placed Northern Rock’s A credit rating on positive outlook in reaction to the UK motgage bank’s Whinstone Capital Management deal. At just €422.7 million this credit-linked note via Barclays Capital and Lehman Brothers is far from the biggest deal in European structured finance but it is certainly one of the more significant from a capital and risk management perspective.
It is a funded synthetic securitization of the first-loss position of Northern Rock’s Granite RMBS programme. It is designed to cut the risk relating to the Granite programme that is retained by Northern Rock, hence S&P’s rapid move.
On any RMBS transaction the originator, after selling off triple A, single A and triple B notes, retains a substantial stub of risk called the first-loss piece. S&P accepted the funding benefits from Northern Rock’s Granite programme, a little under $70 billion raised in six years, but did not give it much recognition for credit risk transfer.
At £500 million ($881 million), Northern Rock’s first-loss position was substantial.